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An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns

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  • Allan Timmermann

    (University of California San Diego, La Jolla, USA)

  • Massimo Guidolin

    (Federal Reserve Bank of St. Louis, USA)

Abstract

This paper considers a variety of econometric models for the joint distribution of US stock and bond returns in the presence of regime switching dynamics. While simple two- or three-state models capture the univariate dynamics in bond and stock returns, a more complicated four-state model with regimes characterized as crash, slow growth, bull and recovery states is required to capture their joint distribution. The transition probability matrix of this model has a very particular form. Exits from the crash state are almost always to the recovery state and occur with close to 50% chance, suggesting a bounce-back effect from the crash to the recovery state. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Allan Timmermann & Massimo Guidolin, 2006. "An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 1-22.
  • Handle: RePEc:jae:japmet:v:21:y:2006:i:1:p:1-22
    DOI: 10.1002/jae.824
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    References listed on IDEAS

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